Sunday, March 11, 2007

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There's lazy reporting and then there's lazy Sunday analysis

Over the past few years, the Boston Globe Ideas section has generally been considered one of the best treats of theirs or any Sunday paper. Which is why I was surprised when I read this Matt Steinglass article on the intellectual trendiness among economists of preaching capital controls:

When the Shanghai stock index dropped 9 percent on Feb. 27, touching off sharp slides in markets across the globe, many were quick to recall the Asian financial crisis of 1997. That crisis was triggered not by a drop in stock prices, but by a collapse in the value of the Thai baht, brought on by currency speculators. But the reason the crash of '97 spread from one country to the next, savaging the economies of Indonesia, South Korea, the Philippines, and ultimately non-Asian countries like Russia, was a broad loss of investor confidence in such so-called "emerging markets."

Investors were excited by these economies' high growth rates, but suspicious of regulatory environments that were far from transparent and governments prone to corruption. As they lost confidence in the countries' currencies and securities, investors pulled their money out en masse. Last week, there were concerns that a dramatic drop in Asian stock values might provoke a similar loss of confidence and capital flight....

[Unlike the Wall Street Journal editorial page,] many economists drew precisely the opposite lessons [from the Asian financial crisis]: That open capital markets sometimes behave like irrational mobs, and that government-imposed capital controls can be essential tools for developing countries to preserve stability.

The most famous exponent of this view is the Nobel Prize-winner Joseph Stiglitz, former chairman of President Bill Clinton's Council of Economic Advisors, who was the World Bank's chief economist during the crisis. Interviewed last week on the risks to Asian markets today, Stiglitz said capital controls are widespread in emerging markets, and in many cases, that's a good thing....

[D]espite the persistence of these laissez-faire views, a quiet shift may be taking place. Economists and financial analysts today are more likely than they were 10 years ago to accept the need for certain capital controls. Some are even willing to admit it. (emphasis added)

Now, the bolded sentence is clearly supposed to be the takeaway point of the piece, so I was curious which economist or economists Steinglass found to echo Stiglitz's views on capital controls. It turns out that the economist Steinglass found was.... Joe Stiglitz:
In the decade since the crisis, many economists have come to share these views -- including some within the IMF itself. "In 2003 their chief economist came to the conclusion that the empirical evidence did not show that capital market liberalization worked," Stiglitz says. "It did not lead to more growth, it did not lead to more stability. They still believe it's true, but what they now say is they can't prove it." In some cases, the IMF is actually telling countries that "soft" capital controls, such as tax measures and banking regulations, may be a good idea.
Stiglitz might be correct in his assertion, although in 2003 at least one chief IMF economist was pretty disparaging of capital controls.

Still, that's not the point. If Steinglass' assertion is correct, one should expect to see a quote from at least one other economist. Hell, Steinglass probably could have raided Brad DeLong's archives and probably found something useful.

We don't get either of those things, however. Instead, we get Stiglitz and more Stiglitz. This is insufficient for the assertion that's made in the essay.

Bad Ideas section. Bad, bad, bad.

posted by Dan on 03.11.07 at 11:33 AM



I understand criticism of academic/journalistic form, but is that an argument against the point of the article?

It seems to me that economics is just one of those fields that often sees ideas put widely into practice before they are widely documented. Such seems the case here.

posted by: Babar on 03.11.07 at 11:33 AM [permalink]

Paul Krugman also suggested capital control during the Asian crisis. He wrote an article "Capital Control Freaks" where he supported temporary capital control. He also gave an interview where he suggested Mahatir was right. These are available at under the sub-heading crisis. Brad and Bhagwati had public spat about the desirability of capital control; Bhagwati is in favor. Recently, Brad has changed his position and has argued in support of captial control. I guess we should not expect a journalist on deadline pressure to know all these.

posted by: Asif Dowla on 03.11.07 at 11:33 AM [permalink]


I also believe that Jagdish Bhagwati is very suspect of limiting capital controls. He wrote "The Capital Myth; The Difference Between Trade in Widgets and Dollars" in Foreign Affairs, May 1998. He presented the same position (critical of bilateral agreements that prohibit capital controls) in testimony before the House of Representatives in 2003 (query "bhagwati capital controls").

posted by: mpersoon on 03.11.07 at 11:33 AM [permalink]

Kenneth Rogoff, IMF Director of Research:

"These days, everyone agrees that a more eclectic approach to capital account liberalization is required"

"there seems to be a good case for keeping an open mind on the issue of capital controls and debt"

Read the article for the relevent and of course necessary qualifiacations and caution.

posted by: George on 03.11.07 at 11:33 AM [permalink]

Dan -- I think you go a bit too far here. True citing stiglitz on stiglitz is a bit sloppy, but there has been a shift, best embodied in the IMF's paper (Rogoff, Wei, some others). If you want other names that i suspect are rather open to well designed inflow curbs, try Eichengreen, Goldstein and Kenen (as well as folks like Kurgman and Rodrik). if you include Stiglitz's more general definition of controls that includes efforts to curb cross border bank lending and other particularly risky forms of cross border flows, the shift is even broader. In the post Asian crisis archictecture effort, the uS treasury strongly endorsed bank regulation that focused explicitly on the risks associted with fx denominated cross border flows into the banking system (what Stiglitz calls soft controls). And in the current debate, most people recognize that China can only sustain a path of gradual appreciation with controls on inflows See Bergsten's testimony to the congress on this, among others. And even here capital flows are causing problems -- as folks try to arbitrage the expected RMB appreciation.

Both China and India "took off" growth wise without fully liberalizing their capital account, and in China's case, very rapid growth has not been associated with liberalization of controls on inflows (those are actually getting tighter) or in aggregate, relying on foreign savings to finance growth. Call it a case of one, but it is a case of 1.3 trillion people -- that is bound to have an impact on the debate.

posted by: brad setser on 03.11.07 at 11:33 AM [permalink]

Coming to this comment a couple months late through the vice of self-googling, I respond:

The sentence that ticks Daniel off was initially a transition to the pro-capital-controls views of Dominic Scriven. The point was that even some fund managers these days feel capital controls can be useful. I agree that as changed, it feels a bit weird, as though you're coming back to the same source again. In an article of this length, though, one can only quote so many people. What I did was cite 3 sources of authority: a Nobel Prize winning economist; the manager of the largest portfolio investment fund in Vietnam; and the IMF itself. That seemed to me pretty substantial support for the thesis. One is expected, as a journalist, to have read or interviewed other sources beyond what one cites in the piece, to ensure one has the story right. I did.

It is not hard to find other economists who also believe in the value of capital controls, as Daniel notes. So what exactly is he criticizing? Does he contend the substance of the article was wrong? Or is he simply saying I should have put more economists' names in the piece, to convey a greater impression of authority? If so, fine. But I object to being called "lazy". The people who were "lazy" were the authors of the WSJ pieces I was responding to, who voiced a highly doubtful, not to say discredited, idea straight out of 1996 -- the proposition that an unregulated market always does the best job of determining the value of currencies and securities -- as if the Asian financial crisis had never happened, and as if none of the criticisms of financial market liberalization which ensued had ever been written (or, in many cases, adopted successfully as policy).

posted by: Matt Steinglass on 03.11.07 at 11:33 AM [permalink]

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